National Institute of Economic and Social Research

Friday, 6 July 2012

Explaining the benefit system to John Humphrys..

I was on the Today programme this morning to discuss a report, written by Howard Reed of Landman Economics for a group of childrens' charities, called "In the Eye of the Storm", about the impact of tax and spending change on "vulnerable children and families".

John Humphrys began by asking me what the report showed. I said that it showed that, not surprisingly, tax rises and benefit cuts, combined with cuts to public services, were likely to disproportionately affect the poorest. I expected - evidently naively - that to be a prelude to a more detailed discussion of the analysis in the report and the implications. We never got to the report itself; instead, Humphrydd asked:

“surely it isn't the case that benefits are being cut for
the poorest? There are benefit cuts yes, but mostly they’re caps on the higher
limits, on the top limits”

You can listen to it all (only three minutes) here. [begins at 2h 57min]. It is clear that Humphries really is under the impression that cuts to welfare benefits will not impact the poorest or genuinely disabled people.

But, as everyone who has ever worked on or researched welfare or social security policy knows, this is complete fantasy. Of course benefit cuts disproportionately affect the poorest, because, by and large, benefits go to poor people. ONS figures here show that for non-retired households, benefits make up more than 45% of the gross income of the lowest quintile (the poorest fifth); but only about 1.5% of the income of the top quintile. So the fact that benefit cuts will hit the poorest hardest is not because those cutting the welfare budget have chosen to pick on the poor; it is simply an inevitable result of cutting working-age benefits (pensioner benefits, of course, have largely been left unscathed).

As for the household benefits cap, the DWP Impact Assessment estimates it will save a little under £300 million a year. This is simply lost in the rounding when you look at the £18 billion a year that the government plans to cut from the working age welfare bill. The main items are set out in a helpful summary by Inclusion:

"The main savings announced in the 2010 Budget (June) and Spending Review (November) were:

£5.8bn by linking benefit increases to the Consumer Prices Index, rather than the Retail Prices Index

£3.6bn from a freeze on Child Benefit and removing the entitlement for higher-rate tax payers

£2.6bn from changes to Tax Credits

£1.9bn from Housing Benefit reforms

£1.2bn from Disability Living Allowance reforms

£1.2bn from time-limiting contributory Employment and Support Allowance"

Of these, only the child benefit changes will disproportionately hit the better off. The rest will mostly hit those at the lower end of the income distribution; by and large families with children, either out of work or in low paid work, and/or disabled people. This simply isn't news: there are more IFS analyses than I can remember showing variants of this story. Here's a slide from the most recent one:

Note that this looks at benefit and tax changes; since the tax changes hit the rich, and the benefit ones mostly the poor, the benefit changes on their own would look far more targeted on the poor. Again, that's not because the government has chosen to target the poor for benefit cuts; it's mostly just an arithmetic consequence of the fact that it's mostly the poor who get benefits.

Let me be clear that I am not making a specific argument about policy here. Any government undertaking a fiscal consolidation on the current scale would have had to look at spending on welfare benefits. And, as I've set out, any substantial reduction in welfare benefits for people of working age will hit the poorest hard. John Humphries and I should have discussed the consequences of this unpleasant reality on Today. I shouldn't have had to explain the facts and the arithmetic to him.